Boost wages or cut rents?
7 Mar 2013
Politicians have their crosshairs firmly centered on the ‘squeezed middle’. These low- and middle-income families, excellently described by the Resolution Foundation, will be key to all electoral campaigns in 2015.
The financial squeeze for these families has come from stagnating incomes and the rising cost of living. So far, most political attention has been on the income side of the equation.
From the Living Wage, to the income tax threshold, to tax credits and the 10p tax band, politicians have focused on income not expenditure.
When politicians have looked at living costs, they’ve boosted income (such as the winter fuel allowance for pensioners). Why not also tackle the rising costs themselves?
Housing costs especially have not received the political attention they merit, given their size in most families’ budgets. The Resolution Foundation’s 2013 audit strikingly showed that the ‘squeezed middle’ is increasingly made up of private-renting families. The majority who are under 35 are private renters, up from less than 30% just 10 years ago. The trend looks set to continue [PDF], with more and more families stuck with expensive private rent.
Private renters spend 43% of their income on rent, compared to an average of 19% of income spent on a mortgage by owners, and 29% spent on rent by social tenants. Even in absolute terms, renters pay more than those with mortgages (see below). In London, renters we’ve surveyed are paying more than half of their income just to keep a roof over their heads.
Why not just solve the unaffordable rent problem with higher minimum wages?
Well firstly, it’s a mammoth task. Even the Living Wage is not enough in many cases. To use income policy to make housing affordable would take massive increases in average pay.
Worse, the consequences of higher wages on a housing market that’s not producing enough homes to meet demand is… higher rents!
Medium and high incomes are not a guarantee of home ownership in many parts of the country, especially the South East. As we’ve seen every year for a decade, this means a rapid increase in families renting. Rising demand for a limited supply of rented homes means rising rents and a vicious circle ensues. This is the Rent Trap.
Reducing rents by increasing housing supply could release a huge amount of potential consumer spending. If private renters paid the same housing costs as social renters, there would be an extra £16.2 billion per year of disposable income released into squeezed middle households.*
So, perhaps income-focused policies like the 10p tax band miss the point. They might offer some short-term relief, but without solving the structural problems like housing costs, income policies can only go so far. Politicians need to give this side of the equation much more thought.
*Or £4000 per household. Figures on households by tenure and average housing costs from DCLG, English Housing Survey.